RBNZ believes it is close to defeating inflation
New Zealand's inflation rate, which has declined from an annualised rate of 7.3% in June 2022 to 3.3% in June 2024, is likely to fall within the Reserve Bank of New Zealand's (RBNZ) target range of 1-3% in the second half of this year, according to the central bank’s Monetary Policy Committee.
The committee said that maintaining the official cash rate – which has been at 5.50% since May 2023 – at a “restrictive” level had significantly reduced inflation.
“Some domestically generated price pressures remain strong. But there are signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions,” the committee forecast.
“The decline in inflation reflects receding domestic pricing pressures, as well as lower inflation for goods and services imported into New Zealand. Labour market pressures have eased, reflecting cautious hiring decisions by firms and an increased supply of labour. The level of economic activity, including business and consumer investment spending and investment intentions, is consistent with the restrictive monetary stance.”
RBNZ believes interest rates need to stay high
Looking ahead, RBNZ Chief Economist Paul Conway said there were some remaining challenges in bringing inflation sustainably back to target. Therefore, the Monetary Policy Committee needed to remain vigilant.
“Lower inflation expectations of firms and households will help reinforce the slowdown in inflation, with less pressure to raise prices and demand higher wages. As inflation continues to fall, businesses will be less able to make large price increases, which will help lower inflation persistence,” he said.
“We are using these research insights to help guide our monetary policymaking under flexible inflation targeting. The extent to which broad momentum in domestic inflation continues is a key upside risk. This is partially offset by the potential for a quicker fall in inflation expectations and a more rapid passthrough of weaker demand to prices.
“Overall, a period of restrictive policy is necessary to give us confidence that inflation will return to target over a reasonable timeframe.”
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